Evidence on Informal Insurance in Rural Zimabwe

The test for the presence of full insurance employed by Townsend [Econometrica, 63(3), 539–91, 1994] and various others does not take into account that households rely on buffer stocks to shield their consumption from income shocks. In this paper it is shown how, in the presence of partial insurance, not including buffer stocks leads to estimates that underreport the degree of informal insurance. A test to correct for this omission is developed and is applied to panel data from rural Zimbabwe.